January 2017 – Dow Jones Closes at 18,037

By The Lerner Group on January 3, 2017

On November 1st, The Dow Jones average closed at 18,037. Towards the end of the year, the Dow Jones index approached 20,000. This 9 percent increase in the Dow between these dates was the largest increase for this time period in American history.

What factors brought about this record increase, and in light of these developments, what adjustments should we make to your portfolio?

We believe the sharp increase in stock prices since November reflect the widespread expectation that at least two economic changes are likely to take place: tax rates are likely to be reduced, and some of the rules and regulations that increase the cost of doing business are likely to be revised. Consider each in turn.

The top corporate tax rate is now 35 percent. Lowering the rate to 15 or 20 percent of profits before taxes has been widely discussed in the press. If the top tax rate were to be reduced to these lower rates, reported earnings after taxes would be expected to rise sharply and drive stock prices higher. We believe that the market expectations of tax relief were so strong that investors did not even wait for tax legislation to be introduced, let alone acted upon. Phrased differently, we believe that the record increase in stock prices that took place between the election and inauguration largely reflects the market’s anticipation of a serious tax cut.

Should tax relief actually come to pass, corporations would be free to use their new found increase profits after taxes as they see fit. Some could use a portion to lower the prices they charge their customers, or to increase the salaries they pay their employees. Still others could choose to buy new machinery, open new plants, or expand their companies in a new direction. A few could also use some of their earnings to pay down their debt or raise their dividends. No matter how the funds are spent, the tax relief funds would stimulate our country’s growth.

A second contributing factor to the recent increase in stock prices is the expectation that businesses would experience some relief from the rules and regulations that increase the cost of doing business. As these barriers are reduced, greater capital outlays should take place in capital intensive industries such as oil and gas, electric utilities, or roads and bridge building. These expenditures should also stimulate faster economic growth rates and contribute to both greater inflationary pressures and a rise in interest rates.

How should we respond to the new economic environment that 2017 may bring? First, let us assure you that we do not intend to change the goals we have for your account that is to preserve and increase your wealth. Moreover, we also intend to continue our long standing policy of examining the financial position of every security you hold in your portfolio every two weeks to determine whether it should be sold or continue to be held.

We also expect the number or mergers and acquisitions to increase as firms search out new investment opportunities. Smaller companies are likely to become the investment targets of the larger firms. To be more specific, we expect smaller firms that report rising sales, a high return on assets, and are recognized to have a strong management team to be attractive investment alternatives in the upcoming year. We therefore plan to add such companies to your portfolio holdings as the opportunities arise.

Please call us or our staff if you have any questions about the market or if your personal circumstances change and you would like us to make a specific change in your account. Here’s to wishing you a happy, healthy and prosperous 2017!